Highlights from Q2 Quality Reporting

During Q2 we monitored conference calls and corporate disclosure to see how big a role product quality played in results and estimates. We were not disappointed by the results, with product quality considerations being mentioned across North America. Our team has highlighted some of the interesting excerpts below for your benefit. 

Company: Athabasca Oil

Excerpt: The global heavy oil market continues to tighten with supply declines in Venezuela and Mexico, OPEC cuts and growing petrochemical demand. These changing dynamics are supporting heavy oil pricing benchmarks with US refineries in the PADD II and III regions requiring a heavier feedstock. The majority of onshore North American liquids production growth is light or condensate spec and slated for export to the international market. (Q2, 2019 Release)

Validere Note: Heavy oil is benefitting from tightening global supply and growing demand. Much of this demand is due to demand growth in refined products that are produced more effectively by processing heavier volumes (vs. lighter products, resulting in higher gasoline yields). 


Company: Devon Energy

Excerpt: Lastly, I want to conclude my remarks in the Delaware by highlighting the good work that we have performed to maximize the value of our barrels produced. Beginning with our oil realizations, a major victory for us has been the avoidance of price deducts associated with the new West Texas Light index. We have leveraged our operating scale and acreage dedications in the area to attain multiyear contractual guarantees that ensure we receive Midland WTI pricing with gravity protection up to 60 degree API. (Q2, 2019 Transcript)

Validere Note: Quality considerations are starting to be included in North American contracts. 


Company: Painted Pony

Excerpt: Returned natural gas liquids yield to 9.2% of total production volumes during the second quarter of 2019 from 8.0% during the first quarter of 2019, the result of a resolution of average daily production volume liquids allocation procedures. (Q2, 2019 Release)

Validere Note: A critical factor in allocations is accurate product quality measurement and tracking. Small gaps in something as simple as meter calibration, combined changing inputs, can make it very difficult to track contributions. This results in future rebalances. 


Company: Parsley Energy

Excerpt: And as you can see in the map on the right, our acreage tends to sit in that API gravity sweet spot with our weighted average barrel of production registering 41 degree. Importantly, our sales volumes are not subject to any discount applied to higher API gravity crudes like West Texas light which is recently traded at a more than $2 per barrel discount to WTI Midland prices. In an environment where every extra dollar of margin will have a meaningful impact on free cash flow, possessing a favorable crude quality is a nice inherent advantage. (Q2, 2019 Transcript)

Validere Note: Permian cash flows and NAVs are starting to be significantly impacted by whether a company’s production qualifies as West Texas Light. WTL classification results in a pricing discount on those volumes. 


Company: SemGroup

Excerpt: As implementation of IMO 2020 approaches, heated storage demand remains high for our tankage. (Q2, 2019 Transcript)

Validere Note: The flexibility to heat fuels when required is useful to provide ship owners the option to use higher viscosity fuels (likely most applicable when the clients have scrubbers installed).


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Mark Le Dain